The Effects of Changes in State Tax Enforcement on Corporate Income Tax Collections

Abstract

Using a new hand-collected database on state department of revenue (DOR) expenditures, this study examines the association between changes in state corporate tax enforcement expenditures and state-level tax collections during the 2000-2008 time period. The results, after addressing endogeneity concerns using a changes specification and state fixed effects, suggest a one dollar increase (decrease) in current period corporate enforcement is associated with a $8 to $11 increase (decrease) in state tax collections two years into the future. The association appears to be attenuated in states with restrictive tax policies (i.e. unitary/combined reporting andrelated party add-back provisions) suggesting that enforcement and restrictive tax policies could serve as substitutes.

Keywords: State corporate income tax, tax enforcement, state income tax collections